Market Manipulation Through Short Selling Attacks and Misleading Financial Analyses

• Author: Professor Dr. Thomas M.J. Möllers
• Pages: 91-126

Market Manipulation Through Short Selling

Attacks and Misleading Financial Analyses

P

ROFESSOR

D

R

. T

HOMAS

M.J. M

¨

OLLERS

*

I. Short Sales and Targeted Price Drops Due to Misinformation

A. M

ARKET

M

ANIPULATION

1. The Protective Purpose of the Offense

Stock exchanges are the lifeblood of a market economy or, in the words of

the former Vice-President of the Bundesbank, “a source and a reflection of

the growth, innovation, and competitive power of a market economy.”

1

They aim to determine the “right price”

2

in the shortest possible time. They

are extremely important for the respective national economy: for companies,

in order to provide (risk) capital; for investors, in order to be able to use an

attractive form of investment, for example for pension provision for

consumers.

3

The prohibition of market manipulation serves the reliability

and truth of price information on the stock exchanges.

4

Investors’

confidence in the integrity of the market must be protected—that is, the loss

* Professor Dr. Thomas M.J. M¨ollers is faculty of law, and Chair of Private Law, Private

International Law and Comparative Law at the Universit¨at (University) Augsburg, Germany. I

would like to thank the staff of Bundesanstalt f¨ur Finanzdienstleistungen [BaFin] [Federal

Financial Supervisory Authority], the Hessian Ministry of Economics, the Munich I Public

Prosecutor’s Office, and the legal department of the companies concerned for the further

discussion.

1. Franz-Josef Zeitler, in B

¨

ORSENREFORM

, V (Klaus J. Hopt et al. eds., 1997) (Original

German quote: “Quelle wie Spiegelbild der Wachstums-, Innovations- und Wettbewerbskraft

einer Marktwirtschaft”).

2. For the objective of proper pricing, see Regierungsentwurf [Cabinet Draft], D

EUTSCHER

B

UNDESTAG

: D

RUCKSACHEN

[BT] 12/6679, at 79 (Ger.).

3. Jeremy Greenwood & Bruce Smith, Financial Markets in Development, and the Development

of Financial Markets, 21 J.

OF

E

CON

. D

YNAMICS

& C

ONTROL

145, 145 – 47 (1997); Thomas

M.J. M¨ollers, Effizienz als Maßstab des Kapitalmarktrechts, 208 A

RCHIV F ¨

UR DIE CIVILISTISCHE

P

RAXIS

[A

C

P] 1, 7 (2008); Stefan Grundmann, Kreditwesen und Organisation, in HGB,

B

ANKVERTRAGSRECHT

, I

NVESTMENT

B

ANKING

T

EIL

1, mn. 8 et seq. (Claus-Wilhelm Canaris

& Hermann Staub eds., 5th ed. 2017). For more on the protection of functions, see Mark

Oulds, in B

ANK

-

UND

K

APITALMARKTRECHT

, mn. 14.143 (Arne Wittig eds., 2d ed. 2011);

S

USANNE

K

ALSS ET AL

., K

APITALMARKTRECHT

, mn. 17 (2d ed. 2015); P

ETRA

B

UCK

-H

EEB

,

K

APITALMARKTRECHT

, mn. 2 (9th ed. 2017).

4. Wertpapierhandelsgesetz [WpHG] [Securities Trading Act], Sept. 9, 1998, BGB

L

I at

2708, last amended by Gesetz [G], June 22, 2011, BGB

L

I at 1126, § 20(a) (Ger.), https://www

.bafin.de/SharedDocs/Veroeffentlichungen/EN/Aufsichtsrecht/Gesetz/WpHG_en.html (with

regard to the old version of section 20a); see Regierungsentwurf [Cabinet Draft], D

EUTSCHER

B

UNDESTAG

: D

RUCKSACHEN

[BT] 14/8017, at 176 (Ger.).

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92 THE INTERNATIONAL LAWYER [VOL. 53, NO. 1

of confidence due to market manipulation must be avoided. The recitals of

the Market Abuse Regulation (MAR) contain the correct wording: “Market

abuse harms the integrity of financial markets and public confidence in

securities and derivatives.”

5

If legal protection on the stock exchanges is

inadequate and there is a lack of trust, citizens will not buy shares.

6

The European markets are demonstrably less liquid, and the price-

earnings ratio of listed companies is significantly lower than in the United

States.

7

German consumers also hold significantly fewer shares than

consumers in other Member States.

8

In this respect, European legislators

should have an interest in correcting legal deficits and closing gaps. This

was also recognized as the objective of the European legislature with the

Lamfalussy procedures.

9

The following shows that this goal has not yet

been achieved in the area of short-selling attacks through misleading

research reports.

2. Digitization and Short Selling Attacks – A Global Business Model

Recently, Elon Musk promised to withdraw from the stock market,

delisting the company TESLA, for a price of 420 USD per share.

10

The

financing of the delisting had never been seriously audited, he rather wanted

to impress his girlfriend.

11

This conduct was “reckless” and an

impermissible market manipulation.

12

The SEC proposed that TESLA and

Elon Musk pay twenty million USD respectively and that Elon Musk resign

5. See Commission Regulation 596/2014, 2014 O.J. (L 173) 1 (EU).

6. James Chen, Stock Market, I

NVESTOPEDIA

(Jun. 25, 2019), https://www.investopedia.com/

terms/s/shortsale.asp.

7. See generally T

HOMAS

M.J. M

¨

OLLERS ET AL

., A

D

-

HOC

-P

UBLIZIT¨

AT

: H

ANDBUCH DER

R

ECHTE UND

P

FLICHTEN VON B ¨

ORSENNOTIERTEN

U

NTERNEHMEN UND

K

APITALANLEGERN

(C.H. Beck ed., 2003). See Rafael La Porta et al., What Works in Securities Laws?, 61 J. F

IN

. 1, 2

(2006) (general information on the “law matters hypothesis”); John C. Coffee, Law and the

Market: The Impact of Enforcement, 156 U. P

ENN

. L. R

EV

. 229, 230 (2007); Utpal Bhattacharya

& Hazem Daouk, When No Law is Better than a Good Law, 13 R

EV

. F

IN

. 577, 578, 591 (2009);

Thomas M.J. M¨ollers, Effizienz als Maßstab des Kapitalmarktrechts, 208 A

RCHIV F ¨

UR DIE

CIVILISTISCHE

P

RAXIS

[A

C

P] 1, 4 (2008); Philipp Maume, Staatliche Rechtsdurchsetzung im

deutschen Kapitalmarktrecht: eine kritische Bestandsaufnahme, 180 Z

EITSCHRIFT F ¨

UR DAS GESAMTE

H

ANDELSRECHT UND

W

IRTSCHAFTSRECHT

[ZHR] 358, 362 (2016).

8. Coffee, supra note 7, at 259.

9. Thomas M. J. M ¨ollers, Europ ¨aische Methoden– und Gesetzgebungslehre im Kapitalmarktrecht

Vollharmonisierung, Generalklauseln und soft law im Rahmen des Lamfalussy-Verfahrens als Mittel zur

Etablierung von Standards, Z

EITSCHRIFT F ¨

UR

E

UROP¨

AISCHES

P

RIVATRECHT

[ZE

U

P] 480, 482

(2008); see Commission Proposal for an Action Plan on Building a Capital Markets Union, COM

(2015) 468 final (Sept. 30, 2015).

10. Complaint at 1 – 2, U.S. Sec. & Exch. Comm’n v. Musk, No. 1:18-cv-8865 (S.D.N.Y.

Sept. 27, 2018), https://www.sec.gov/litigation/complaints/2018/comp-pr2018-219.pdf

11. Id. at 7 – 8.

12. Securities Exchange Act of 1934 § 10(b), 15 U.S.C. § 78j(b); SEC Rule 10-b, 17 C.F.R.

§ 240.10b—5 (1951).

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2020] SHORT SELLING ATTACKS & MISLEADING FINANCIAL ANALYSES 93

from the board of directors.

13

Judge Alisan Nathan approved this

settlement.

14

Such forms of market manipulation are easy to assess legally.

Cases in which the collaboration of several parties is legally problematic are

significantly more difficult. The following part discusses short-selling

attacks which often coincide with misleading financial analyses.

The internationally interwoven stock exchanges show perfectly how

powerful innovation and digitization are. Rumors are spreading at lightning

speed; millions can be moved with a mouse click by market participants

betting on rising or falling prices. “Money knows no fatherland.”

15

Digitalization is both a blessing and a curse for the stock markets. It creates

transparency and facilitates a highly lucrative business model for organized

crime.

16

In recent times, numerous listed companies have been exposed to

attacks from market participants on German stock exchanges who always

implement a similar strategy: short sellers speculate on falling prices by short

selling and spread negative rumors or negative financial analyses via Twitter

or similar media beforehand.

17

In Germany, listed companies such as

Aurelius, Str ¨oer, Wirecard, and Pro-SiebenSat.1 Media have been

repeatedly affected by these short selling attacks in recent years.

18

Share

prices plummeted by up to thirty percent within a very short period of

time.

19

The most recent attack took place in January and February 2019,

when the Financial Times brought up accusations of counterfeinting and

13. Complaint, supra note 10, at 21 – 22; Jackie Wattles, Elon Musk Agrees to Pay $20 Million

and Quit as Tesla Chairman in Deal With SEC, CNN (Sept. 30, 2018, 12:57 PM), https://

money.cnn.com/2018/09/29/technology/business/elon-musk-tesla-sec-settlement/index.html.

14. Judge Approves Musk, SEC Settlement, A

UTOMOTIVE

N

EWS

E

UROPE

(May 1, 2019, 6:08

PM), https://europe.autonews.com/automakers/judge-approves-musk-sec-settlement.

15. P

ETER

F. D

RUCKER

, P

OST

-C

APITALIST

S

OCIETY

130 (1993).

16. Tatiana Tropina, Do Digital Technologies Facilitate Illicit Financial Flows?, W

ORLD

D

EVELOPMENT

R

EPORT

1, 17 (2016), http://documents.worldbank.org/curated/en/896341468

190180202/pdf/102953-WP-Box394845B-PUBLIC-WDR16-BP-Do-Digital-Technologies-

Facilitate-Illicit-Financial-Flows-Tropina.pdf.

17. Finanzmarktnovellierungsgesetz [FiMaNoG] [First Financial Market Amendment Act]

June 30, 2016, BGB

L

I at 1514 (Ger.). Before the term “financial analysis” was used, but after

Erstes, the term has been adapted to European legal acts so that it is now referred to as

“investment recommendation.”

18. On the facts, for example, see Martin Schockenhoff & Johannes Culmann, Rechtsschutz

gegen Leerverk¨aufer?, D

IE

A

KTIENGESELLSCHAFT

[AG] 517, 518 (2016). On ProSiebenSat.1,

see Nikolas Kessler, ProSiebenSat.1: Short-Attacke!, D

ER

A

KTION¨

AR

(June 3, 2018), https://www

.deraktionaer.de/artikel/aktien/prosiebensat1-short-attacke-362400.html. See also Peter O.

M¨ulbert, Rechtsschutzl ¨ucken bei Short Seller-Attacken – und wenn ja, welche?, 182 Z

EITSCHRIFT

F¨

UR DAS GESAMTE

H

ANDELSRECHT UND

W

IRTSCHAFTSRECHT

[ZHR] 105 (2018). M¨ulbert’s

contribution, however, assumes without further subsumption that the attacks are legally

permissible. See id.

19. See Aurelius-Atkie: Ein Jahr nach Dem Hedgefonds-Angriff, B

¨

ORSE

O

NLINE

, (March 27,

2018, 3:00 AM), https://www.boerse-online.de/nachrichten/aktien/aurelius-aktie-ein-jahr-

nach-dem-hedgefonds-angriff-1019450414 (price fall of Wirecard on Feb. 24, 2016; price fall of

Str¨oer on Apr. 21, 2016; price fall of Aurelius from 66 to 45 Euro).

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